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    The document provides information about the Ride-On-Wave Company's manufacturing overhead allocation for 2014. It gives budgeted and actual overhead costs and direct manufacturing labor costs. It also provides ending inventory balances for work in process, finished goods, and cost of goods sold as of December 31, 2014. The required tasks are to calculate the overhead allocation rate, determine if overhead was under- or over-allocated, and calculate ending inventory balances if the underallocated amount is prorated in different ways.

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    The document provides information about the Ride-On-Wave Company's manufacturing overhead allocation for 2014. It gives budgeted and actual overhead costs and direct manufacturing labor costs. It also provides ending inventory balances for work in process, finished goods, and cost of goods sold as of December 31, 2014. The required tasks are to calculate the overhead allocation rate, determine if overhead was under- or over-allocated, and calculate ending inventory balances if the underallocated amount is prorated in different ways.

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    The document provides information about the Ride-On-Wave Company's manufacturing overhead allocation for 2014. It gives budgeted and actual overhead costs and direct manufacturing labor costs. It also provides ending inventory balances for work in process, finished goods, and cost of goods sold as of December 31, 2014. The required tasks are to calculate the overhead allocation rate, determine if overhead was under- or over-allocated, and calculate ending inventory balances if the underallocated amount is prorated in different ways.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    42 views2 pages

    Download

    Uploaded by

    Raine Piliin
    The document provides information about the Ride-On-Wave Company's manufacturing overhead allocation for 2014. It gives budgeted and actual overhead costs and direct manufacturing labor costs. It also provides ending inventory balances for work in process, finished goods, and cost of goods sold as of December 31, 2014. The required tasks are to calculate the overhead allocation rate, determine if overhead was under- or over-allocated, and calculate ending inventory balances if the underallocated amount is prorated in different ways.

    Copyright:

    © All Rights Reserved
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    Download as pdf or txt
    of 2

    Exercise 04-35 Proration of overhead.

    The Ride-On-Wave Company (ROW) produces a line of non-motorized boats. ROW uses
    a normal-costing system and allocates manufacturing overhead using direct
    manufacturing labor cost. The following data are for 2014:
    Budgeted manufacturing overhead cost $125,000
    Budgeted direct manufacturing labor cost $250,000
    Actual manufacturing overhead cost $117,000
    Actual direct manufacturing labor cost $228,000
    Inventory balances on December 31, 2014, were as follows:
    2014 direct manufacturing
    Account Ending balance labor cost in ending balance
    Work in process $ 50,700 $ 20,520
    Finished goods 245,050 59,280
    Cost of goods sold 549,250 148,200

    Required:
    1. Calculate the manufacturing overhead allocation rate.
    2. Compute the amount of under- or overallocated manufacturing overhead.
    3. Calculate the ending balances in work in process, finished goods, and cost of goods
    sold if under- or overallocated manufacturing overhead is as follows:
    a. Written off to cost of goods sold
    b. Prorated based on ending balances (before proration) in each of the three accounts
    c. Prorated based on the overhead allocated in 2014 in the ending balances (before
    proration) in each of the three accounts
    4. Which method would you choose? Justify your answer.

    SOLUTION

    1. Budgeted manufacturing Budgeted manufacturing overhead cost


    =
    overhead rate Budgeted direct manufacturing labor cost

    $125, 000
      50% of direct manufacturing labor cost
    $250, 000

    2. Overhead allocated = 50%  Actual direct manufacturing labor cost


    = 50%  $228,000 = $114,000

    Underallocated Actual
    Allocated plant
    manufacturing = manufacturing –
    overhead costs
    overhead overhead costs
    = $117,000 – $114,000 = $3,000

    Underallocated manufacturing overhead = $3,000

    1
    3a. All underallocated manufacturing overhead is written off to cost of goods sold.

    Both work-in-process (WIP) and finished goods inventory remain unchanged.

    Dec. 31, 2014 Proration of $3,000 Dec. 31, 2014


    Balance Underallocated Balance
    (Before Proration) Manuf. Overhead (After Proration)
    Account (1) (2) (3) = (1) + (2)
    WIP $ 50,700 $ 0 $ 50,700
    Finished Goods 245,050 0 245,050
    Cost of Goods Sold 549,250 3,000 552,250
    Total $845,000 $3,000 $848,000

    3b. Underallocated manufacturing overhead prorated based on ending balances:

    Dec. 31, 2014 Account Proration of $3,000 Dec. 31, 2014


    Account Balance Balance as a Underallocated Account Balance
    (Before Proration) Percent of Total Manuf. Overhead (After Proration)
    Account (1) (2) = (1) ÷ $845,000 (3) = (2)  $3,000 (4) = (1) + (3)
    WIP $ 50,700 0.06 0.06  $3,000 = $ 180 $ 50,880
    Finished Goods 245,050 0.29 0.29  $3,000 = 870 245,920
    Cost of Goods Sold 549,250 0.65 0.65  $3,000 = 1,950 551,200
    Total $845,000 1.00 $3,000 $848,000

    3c. Underallocated manufacturing overhead prorated based on 2014 overhead in ending


    balances:

    Allocated
    Manuf.
    Dec. 31, 2014 Overhead in Allocated Manuf. Dec. 31, 2014
    Account Dec. 31, 2014 Overhead in Account
    Balance Balance Dec. 31, 2014 Proration of $3,000 Balance
    (Before (Before Balance as a Underallocated (After
    Proration) Proration) Percent of Total Manuf. Overhead Proration)
    Account (1) (2) (3) = (2) ÷ $114,000 (4) = (3)  $3,000 (5) = (1) + (4)
    WIP $ 50,700 $ 10,260a 0.09 0.09  $3,000 = $ 270 $ 50,970
    Finished Goods 245,050 29,640b 0.26 0.26  $3,000 = 780 245,830
    Cost of Goods Sold 549,250 74,100c 0.65 0.65  $3,000 = 1,950 551,200
    Total $845,000 $114,000 1.00 $3,000 $848,000

    Overhead allocated = Direct manuf. labor cost  50% = $20,520; $59,280; $148,200 
    a,b,c

    50%
    4. Writing off all of the underallocated manufacturing overhead to Cost of Goods Sold
    (CGS) is usually warranted when CGS is large relative to Work-in-Process and Finished
    Goods Inventory and the underallocated manufacturing overhead is immaterial. Both
    these conditions apply in this case. ROW should write off the $3,000 underallocated
    manufacturing overhead to Cost of Goods Sold Account.

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